Fendrich U.S.

Fendrich U.S. has a wholly owned subsidiary (Irefend, LLC) in Ireland that manufactures specialized computer memory components.The production costs amount to $250.00 per unit.Fendrich U.S. is expecting to import approximately 40,000 units in 2019 and sell them to computer manufacturers in the U.S. at a price of $640.00 per unit.The following information applies:

United StatesIreland

Income tax rate21.0%12.5%

Import duty rate8.5%15.0%

Withholding tax rate on dividends-5.0%

Fendrich U.S. pays for shipping to the U.S. at $8.00 per unit.Import duties are levied on the invoice (transfer) price.As there are some concerns about the stability of the Euro currency, the Irish subsidiary is expected to repatriate 75% of its income as dividends to Fendrich U.S.

Irefend, LLC has excess capacity and supplies other distributors with branded components, selling them at an average price of $425.00.The components delivered to Fendrich U.S. require less packaging, branding, and marketing and as a result have a value of $20.00 less than the components sold to independent distributors. Production costs are not affected by these changes.

In addition to the costs directly related to the product, Irefend, LLC incurs other operating costs of $18.00 per unit and Fendrich incurs other operating costs of $55.00 per unit.

There are several competitors to Fendrich in the market.After researching Standard & Poor's Industry Surveys, Fendrich estimates that these wholesale competitors generate an average gross profit of 40% and a net profit margin of 20%. Manufacturers of similar products average a markup on cost to produce of about 60%.

Required:

a.Determine the possible transfer prices under the (1) Comparable Uncontrolled Price, (2) Resale Price (Comparable Gross Profit), and (3) the cost-plus methods. Be sure to document your work/calculations.

b.Assume that any of the methods above are acceptable to both the U.S. and Irish taxing authorities.Determine which transfer price would maximize Fendrich's worldwide after-tax cash flow from the sale of the components. Be sure to document your work/calculations.

TRANSFER PRICING ANALYSIS TEMPLATE - US Operation Importing Foreign Operation US Operation Consolidated Sales Cost of sales: Product cost Transportation cost Import duty Gross profit Less: Other costs Taxable income Less: Income tax -tax inc Less: Withholding Taxes Net Cash Flow (per unit) Net Cash Flow (total) Effective Tax Rate INPUT VALUES Retail price Transfer price TP Basis: Cost to produce Transportation cost Transportation cost paid by Foreign Source other costs US other costs Volume Expected % Dividend Repatriation Import Duty US income tax rate Foreign income tax rate Foreign withholding tax rate O Hi 128 1 9 W